An Outlook of U.K Economy - Case Study Example

Running head: An Outlook of U.K Economy An Outlook of U.K Economy s An Outlook ofU.K Economy "The UK, a leading trading power and financial centre, is one of the quintets of trillion dollar economies of Western Europe. Over the past two decades, the government has greatly reduced public ownership and contained the growth of social welfare programs. Agriculture is intensive, highly mechanised, and efficient by European standards, producing about 60% of food needs with less than 2% of the labour force. The UK has large coal, natural gas, and oil reserves; primary energy production accounts for 10% of GDP, one of the highest shares of any industrial nation. Services, particularly banking, insurance, and business services, account by far for the largest proportion of GDP while industry continues to decline in importance. GDP growth slipped in 2001-03 as the global downturn, the high value of the pound, and the bursting of the "new economy" bubble hurt manufacturing and exports. Output recovered in 2004, to 3.2% growth, then slowed to 1.7% in 2005 and 2.7% in 2006. " (Exxun.com, 2007) The Economy of the United Kingdom can be classified as the "capitalist" economy. The most prominent characteristic of the capitalist economy is the control of few people on a large amount of Capital. These people are also responsible for taking important economic decisions. With the changing international circumstances the Governments of the world including United Kingdom felt the need of restricting the use of power of a specific group of people for their own commercial interests. This intervention resulted in shape of the British economy which can described as a "mixed" economy, with government playing an important role along with private enterprise. Although British people often disagree about exactly where to draw the line between their beliefs regarding, both free enterprise and government management, the mixed economy they have developed has been remarkably successful. Basic Ingredients of the U.K. Economy: The natural resources are considered as the most important ingredient of a nation's economic system. The United Kingdom is blessed with enormous reserves of minerals. The fertile soil and the moderate climatic conditions effectively eke the farming process.The labour plays vital role in the growth of an economy. Higher level of working population is considered as an important indicator of a progressive economy. The labour market of the U.K has always remained competitive due to an abundant supply of productive labour. A unique characteristic of the labour force is diversity. The 20th century British labour force constituted Asians and Latin Americans as the major part. This supply of the immigrants in the British job market also resulted in some periods of high unemployment. Many of these immigrants provide their services on relatively lower wages as compare to the native citizens. With the abundant supply of labour and the factors of production the economic growth multiplied increasing the chances for immigrants to find more job opportunities (Conte & Karr, 2001). British economy was facing boom before being hit by the events of 9/11. The economy had fastest growth rate and the lowest unemployment rate which was kept low for thirty years to a level of 3.8% in 2001 but after 9/11 the unemployment rate rose to 6.4% in 2003 more than a million jobs were loss lost during that period. The Government has applied different policies in order to address the issues facing the economy. Govt. has been trying to stable the economy by using cutting of taxes and lowering the interest rates, but these options are for short-term period. There are also some long-term issues to be reviewed. The U.K. economy has benefited from privatisation of industry, free market policies and the development of its oil and gas sector, the largest in the EU. (The Galt Global Review, 2007) Speeding the recovery: For the policy makers the main issue was to accelerate the British economy rapidly. There are two basic options available, cutting of taxes and the lowering the interest rate as implemented by the Government. The government has cut the taxes into two rounds, one trillion tax cut in 2001 and another 350 billion in MAY 2003. The policy raise concerns in the economist and politicians circles. Proponents of the policy undertake the stance that the tax cut policy will save the economy from double dip recession. The second approach depends on the Fed. The banks Federal Reserve System can increase or decrease the interest rate in order to ease borrowing. This resulted in shape of rising trends in Banking and housing industry, but the policy was failed to address the issue of unemployment hence making it ineffective for other industries. These policies have some problems as well. One of the major problems is that they will take time to achieve the aim. Even when it is 100% application of polices still they have some consequences. If the government invest too much cash in the market than prices will increase and inflation rates will be higher but if the government absorb too much of the money there isn't enough cash in the market and economy will take recession period. "One reason the U.K. consumer may slow is the labour market in the States. Although employment is still rising, employment participation has remained quite weak (this is because the number of potential workers has risen faster than the number of jobs in recent months). Hours worked and pay have been softer, particularly in the lower-skilled sectors. A second, critical reason to expect U.K consumer moderation is the U.K housing market. The combination of higher costs for adjustable rate mortgages, lower mortgage refinancing, and falling wealth effects as house price gains slow undermines consumer confidence. The U.K housing market does not appear to be a bubble (at least, not at a national level), so we are not likely to get the devastating consequences of a collapse in house prices. However, the pace of house price growth in the last five years (when U.K house price to income ratios steadily increased) is not likely to be sustained in the future. " (Donovan, 2006) Tax policy is also an important instrument of the Government to control the economic activity. The Tax policy of U.K had a marked impact on economic activity since the last few years. The tax cut introduced by the Bush administration attracted a large amount of investment, which served as the backbone of economic revival in the difficult times of War against terror. Investment is one of main components of GDP, and also one of most variables. Many observers believed that the investment boom of the 1990s would cause a long-term surplus of plant and equipment, stifling further expansion. Not only is the present growth path of the U.K. economy faster than the historical average, but it has also been roughly double the European economic growth rate since the 2001 tax cuts. According to OECD data, European economic growth has slowed dramatically since 2000, declining from a growth rate of 3.7 percent in 2000 to 1.6 percent in 2004. In contrast, the U.K. economy has strengthened since the 2001 recession, and in 2004, economic growth again reached boom-era levels." (Kane, Hederman) Economy and the terrorism are among top of public list as per opinion carried out in past two years. Majority of the British's of the view that inflation and unemployment rate is the core indicator to assess the economy behaviour. However, in March 2003 two-third have of the view that in 2001 tax cuts didn't made much difference this shows difference of opinion among the people. In U.K the most common measures as defined by the Federal Reserves are M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency. M1: M0 - those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts). M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000). M3: M2 + all other CDs, deposits of Eurodollars and repurchase agreements. Publishing M3 statistics were ceased by the Federal Reserve because it was costly to collect the data and the information was not up to the mark. (Discontinuance of M3) In 1970s it was comparatively slower inflation known as stagflation. U.K have made some policies to overcome the problem of inequalities and diminish economic securities. These programs have reduced the inequality in consumption among U.K families and inequalities in pre-tax income for example provision of health services, food stamps to needy people, housing and childcare. In past few decades inequalities have risen more in U.K than in other advanced industrial countries. In terms of household income inequalities U.K is ranked near the top and the government least target its taxes and transfer policies towards moving families out of poverty. The inequality gap can be due to the child poverty relative to a majority of Organisation for Economic Co-operation and Development countries. In U.K infant mortality and life expectancy are worse. In work place they are offering benefits for a shorter duration. The minimum wage is also quite low than average wage. These inefficiencies have risen the unemployment rates in U.K although in other advanced countries unemployment is comparatively higher. The U.K is undertaking least efforts toward the European model of social protection and the reduction of inequalities and poverty. Economic Overview of U.K Economy for the year 2006 GDP (purchasing power parity): $1.928 trillion (2006 est.) GDP Official Exchange rate: $2.346 trillion (2006 est.) GDP - real growth rate: 2.8% (2006 est.) GDP - per capita (PPP): $43,800 (2006 est.) GDP - composition by sector: agriculture: 0.9%, industry: 24.1%, services: 75% (2006 est.) Investment (gross fixed): 18.1% of GDP (2006 est.) Population below poverty line: 17% (2002 est.) Household income or consumption by percentage share: lowest 10%: 2.1% highest 10%: 28.5% (1999) Distribution of family income - Gini index: 36 (1999) Inflation rate (consumer prices): 2.3% (2006 est.) Labour force: 30.48 million (2006 est.) Unemployment rate: 2.9% (2006 est.) Budget revenues per capita: 16,471 USD per capita Public debt: 42.7% of GDP (2006 est.) Industrial production growth rate: 0% (2006 est.) Current account balance: $-88.1 billion (2006 est.) Current account balance - per capita:- -1,449 USD per capita Source: Exxun.com, United Kingdom, page last modified on 19 December 2007, available at http://www.exxun.com/UnitedKingdom/e_ec.html References Conte, C., & Karr, Albert R., (2001). An Outline of the U.K. Economy, U.K. Department of State the Wall Street Journal: February 2001 Discontinuance of M3 Donovan, P., (2006). The need to replace the U.K. consumer, Opinion and Editorial, The Jakarta Post.com, July 12, 2006, retrieved from http://www.thejakartapost.com/yesterdaydetail.aspfileid=20060712.E02 Exxun.com, United Kingdom, page last modified on 19 December 2007, available at http://www.exxun.com/UnitedKingdom/e_ec.html The Galt Global Review (2007). United Kingdom, December 17, 2007, available at http://www.galtglobalreview.com/world/economic_overview.html Read More